The Issue The issues are whether the Respondent Department of Revenue, properly determined that Petitioner Robert Swiger's candidacy for property appraiser in Lake County, Florida would be a conflict of interest or an activity which would interfere with his state employment as an Appraiser II in the Property Tax Administration Program, and if so, whether he became a candidate in violation of Section 110.233(4)(a), Florida Statutes, when he filed a form appointing a campaign treasurer and designating a depository.
Findings Of Fact Respondent employed Petitioner in the Property Tax Administration Program as an Appraiser II beginning September 1990. Petitioner worked in Respondent’s regional office located in Leesburg, Lake County, Florida. Petitioner wrote a letter dated June 7, 1995 to John Everton, Petitioner’s Division Director (now Program Director of Respondent’s Property Tax Administration Program). In the letter, Petitioner requested permission to seek the elective office of Lake County property appraiser while continuing his state employment. By letter dated June 22, 1995, Mr. Everton advised Petitioner that he could not seek the office of property appraiser while employed as an Appraiser II in the Property Tax Administration Program. The letter directed Petitioner to offer his resignation before he pre-filed with the supervisor of election if he decided to pursue his candidacy. On July 12, 1995 Petitioner wrote to L. H. Fuchs, Respondent’s Executive Director, requesting permission to seek the Lake County property appraiser's office. Petitioner wanted to continue working for Respondent until July of 1996 when he would either take a leave of absence or resign when he “qualified” to be on the ballot. Mr. Fuchs received the Petitioner's request on July 19, 1995. In a letter dated July 27, 1995 Mr. Fuchs responded to Petitioner's request by stating: It is the Department's position that your campaign for property appraiser would negatively effect: your ability to perform your job responsibilities which include conducting independent evaluation [sic] of local tax roles; and the agency's efforts to maintain its independence from the local administration of ad valorem taxes. The Executive Director's response went on to state: In your letter to me, you request authorization to continue working for the Department until July 1996, and then, either to take leave of absence without pay or to resign when you qualify to be on the ballot. However, it is the Department's position that your campaign activities commence at the time you pre-file your intent to run for office as required by local rules, because it is at that time that your personal interest in pursuing the office of the property appraiser conflicts with the Department's interest in maintaining complete independence from the local administration of ad valorem taxes. Therefore, your request for approval to run for public office while continuing your employment with the Department is again hereby denied. As instructed by your Division Director, you must resign from the Department prior to commencing your campaign by performing the pre-filing requirement. Failure to do so shall result in disciplinary action to dismiss you from your position in accordance with the Department’s disciplinary standards and procedures, and rule chapter 60K-9, F.A.C., on the grounds that you are in violation of the Department’s Code of Conduct, section 110.223, Florida Statutes, and rule 60K-13.002(3), F.A.C. Mr. Fuchs concluded that his decision was final agency action which Petitioner could appeal pursuant to Section 120.57, Florida Statutes. By letter dated August 16, 1995, Petitioner’s counsel requested clarification of Respondent’s position as set forth in the Executive Director's letter of July 27, 1995. On August 18, 1995, Petitioner filed his request for formal hearing with Respondent. Respondent forwarded this request to the Division of Administrative Hearings on September 1, 1995. On September 8, 1995, Respondent's Deputy General Counsel responded to the request of Petitioner’s counsel for clarification of Respondent’s July 27, 1995 denial letter. This letter sets forth the factual and legal basis for Respondent’s conclusions that: (1) Petitioner’s candidacy would involve an interest which conflicts or activity which interferes with his state employment; and (2) Petitioner would have to resign his state employment before filing his “Appointment of Campaign Treasurer and Designation of Campaign Depository, Form DS-DE 9” (Form DS-DE 9). On September 11, 1995, Petitioner filed his Form DS-DE 9 as required by Section 106.021(1), Florida Statutes, with the Supervisor of Elections for Lake County, Florida. Respondent received proof of such appointment and designation on September 13, 1995. On September 13, 1995, Respondent notified Petitioner that he was dismissed under the extraordinary circumstances provisions of Rule 60K-9.0046, Florida Administrative Code. Respondent dismissed Petitioner because he violated Respondent’s Disciplinary Standard Number 14, Insubordination, and Disciplinary Standard Number 29, Violation of the provisions of law or Department of Revenue rules or policies. Respondent took the position that: (1) Petitioner was insubordinate when he disregarded Respondent’s denial letters and proceeded to file his Form DS-DE 9 without first resigning his state employment; and Petitioner became a candidate in violation of Section 110.233(4), Florida Statutes, and Rule 60K-13, Florida Administrative Code, when he filed his Form DS-DE 9. Petitioner requested a predetermination conference pursuant to Rule 60K-9.0046, Florida Administrative Code. Respondent conducted the conference on September 14, 1995 so that Petitioner’s counsel would have an opportunity to participate. After the conference, Respondent provided Petitioner with a Final Disciplinary Action letter dated September 14, 1995. This letter gave Petitioner the right to appeal the dismissal action to the Public Employees Relations Commission. Respondent is the agency charged with enforcing and implementing the state’s taxing authority. Its regulatory authority includes regulatory oversight and the certification process of county ad valorem tax rolls and related tax administration. County property appraisers determine the just value on each parcel of real estate and the assessment on homestead property pursuant to Sections 193.011 and 193.155, Florida Statutes. Respondent has the duty to insure that each county property appraiser assesses all properties at just value, with equity and uniformity. The working relationship between Respondent’s staff and the county property appraiser and his or her staff is naturally tense. To overcome this tension, Respondent strives to achieve statutory compliance through cooperation with the local property appraiser and his or her staff. The primary focus of Respondent’s Property Tax Administration Program is to determine the relevant level of property assessment in each county and to quantify that assessment level as it relates to a statewide average assessment level. In order for Respondent to accomplish its mission, Respondent has to approve the tax roll and certify the assessment level in each county annually. The Department of Education equalizes school funding and disperses general revenue funds to the county school districts based on their relative assessment level. Each county’s relative ranking dictates the amount that it must levy in county school district taxes. Accordingly, Respondent acting through its appraisers must remain impartial in evaluating the tax rolls in all counties. The position of Appraiser II entails the following duties and responsibilities: Assists county property appraiser and employees in the county appraiser's office in property appraisal techniques to arrive at estimated value conclusions of complex commercial, residential properties, and personal property. Administers policies and procedures pertaining to appraisal of real and personal properties set forth in the Florida Statutes, guidelines and other departmental rules and regulations. Consults with all levels of governmental officials, property owners and private appraisers on problems relative to the appraisal of real and personal property in compliance with existing Florida Statutes and guidelines. Investigates and reports on conduct and performance of all county officials involved in ad valorem tax activities. Investigates taxpayers complaints. Applies the appraisal process as defined by the American Institute of Real Estate Appraisers to arrive at an estimate of value for all types of property. This includes using existing Department of Revenue Cost Manual and other cost manuals as required to arrive at an estimate of value by the cost approach in compliance with existing Florida Statutes and guideline. Performs related duties as required. As an Appraiser II, Petitioner did not routinely perform all of the duties described in his job description. He spent the majority of his time performing appraisal studies, sales ratio studies, and final reviews in the counties surrounding Lake County. Petitioner's job duties and responsibilities entailed safeguarding certain confidential tax information pursuant to: Department Directive 0101.10; (b) Sections 6103 and 7213, Internal Revenue Code (IRC); and (c) various internal security procedures and policies for safeguarding confidential information and information sources. Confidential appraisal information generated by county property appraisers is available to Respondent’s appraisers within a particular region. Likewise, confidential appraisal information generated by Respondent’s appraisers for a particular county in that region is available to all of Respondent’s appraisers within that region. Appraisal studies generated by Respondent’s appraisers together with all supporting documents remain confidential and unavailable to the county property appraisers until the year-end review. During the final review, Respondent’s appraisers and the county property appraisers discuss any discrepancies between their work. The findings of the studies do not become public until the final review process is complete. Petitioner claims that he did not have a computer terminal or the necessary computer skills to personally access confidential information which was stored electronically. However, he could request computer printouts from Respondent’s offices in Tallahassee as well as Respondent’s Leesburg office. Printouts for every piece of property which was a sample in the 1995 Lake County in-depth study was stored in the Leesburg office. That study was complete in June of 1995 before Petitioner requested permission from Respondent to run for office. Respondent began gathering confidential information for the 1997 Lake County in-depth study in October of 1996 before the November general election. Respondent’s appraisers often discuss problems in their work and share information informally. Periodically they engage in a “peer review” of each other’s appraisal work. Nothing prohibited Petitioner from gaining access to confidential information contained within a Lake County in-depth study even though he may not have done the appraisal work in that county. Petitioner had access to that information before it was available to the Lake County property appraiser. The incumbent county property appraiser knew that Petitioner had access to confidential information while he was employed by the state. During the campaign, the incumbent believed that Petitioner continued to receive inside information from Respondent’s staff. The local property appraiser’s perception was unfounded but it caused him to believe that Petitioner had an unfair political advantage. The erroneous perception caused conflict between the incumbent and Respondent. This conflict would have been much worse if Petitioner had run for county property appraiser while continuing his state employment. Even if Petitioner did not seek out confidential information or use it in his political campaign, the perception that it might be available to him jeopardized Respondent’s relationship of cooperation and trust with the incumbent Lake County property appraiser. Respondent does not have a set policy as to whether its appraisers can perform appraisal studies or in-depth studies in the county of their residence. Petitioner did not want to perform appraisals in Lake County because he knew from the beginning that he wanted to run for the office of county property appraiser. He thought he could avoid the appearance of impropriety as long as he did not perform appraisals in Lake County. Respondent never required Petitioner to perform an appraisal study in Lake County. However, Respondent assigned Petitioner on occasion to assist Respondent in completing sales ratio studies by verifying randomly selected sales of real property in Lake County. In verifying the sale of a piece of real property, Petitioner was responsible for determining if the sale was made at arm’s length. This involved making a field inspection to compare the property appraiser’s records to the actual property. If Petitioner could not confirm the sale price with the property owner by mail, he would have to contact the owner or seller by phone or in person. When Petitioner verified sales of real property in Lake County, he presented himself to the public as Respondent’s representative. If Petitioner determined that the county property appraiser’s records did not accurately reflect the sale price, his work could result in a change to the county property appraiser’s numbers to reflect the correct sales price. If Petitioner determined that a sale was not conducted at arm’s length, Petitioner could exclude it from Respondent’s sales ratio study. Thus, Petitioner’s work had a direct impact on Respondent’s decisions relative to the Lake County tax roll. Petitioner performed minimal work in and for Lake County. However, at any time, Respondent could have made a legitimate business decision, including budgetary considerations, which would have required Petitioner to perform job assignments in any county in the Leesburg region, including Lake County. For example, Petitioner provided aid and assistance in Respondent’s Lake City regional office during his employment in the Leesburg regional office. If Petitioner had continued to work in surrounding counties while running for office against the Lake County property appraiser, the public would have had difficulty distinguishing between campaign statements that represented the candidate’s personal opinions and statements that appeared to represent Respondent’s official position. This was true in the campaign even though Petitioner ran as former state employee. Such conflicts severely compromise the public’s perception of Respondent’s independence in local tax administration matters in all the counties under its jurisdiction. Petitioner’s continued state employment during the campaign would have placed Respondent in the middle of a political contest over which it had no control and in which it had a duty to remain neutral. It was difficult enough for Respondent to remain neutral with a former employee seeking elective office. Appraisal studies for one county can affect the appraisal assessments in another county. For instance, the appraisal methodology used by Respondent in Dixie County has been introduced into litigation presently occurring in Levy County. In that case, the neighboring county’s methodology for applying and calculating the “base rate” (a unit of measurement per square foot for dollar valuation of structures) has become an issue. Respondent develops a "systematic base rate" for use in the appraisal system from data gathered from a particular region. Data gathered for the Leesburg regional office included data from Lake, Brevard, Indian River, Flagler, Polk, Sumter, Orange, Marion, Manatee, Volusia, Seminole, Citrus, Hillsborough, Hernando, and Pasco Counties. Respondent uses this data to determine what the appropriate base rate would be for any one of those counties. Thus, Petitioner’s appraisal work affected the appraisal assessments in Lake County even though Respondent did not assign him to do appraisal work that county. When a county’s tax role cannot be reconciled within 90 percent of Respondent’s assessment values, Respondent issues review notices or administrative orders directing compliance. Such disputes can eventually result in litigation with Respondent and the local property appraiser as adverse parties. In that circumstance Respondent’s appraiser must defend his work product in court. Respondent is a party defendant to all lawsuits in which a taxpayer challenges a county property appraiser’s assessment. In these lawsuits Respondent must assist the county property appraiser and defend valuation methodologies which the county property appraiser uses as directed by Respondent. When Respondent becomes involved in litigation, Respondent’s property appraisers are required to testify regarding their work as it relates to the subject property. The appraisers also might be required to defend their work product as analogous appraisal methodologies and practices, even though their work was done in and for different counties from the litigating county. Such testimony would be subject to impeachment if Respondent’s appraisers make campaign statements while running for the office of county property appraiser that are contrary to Respondent’s legal position. The resulting conflicts may not become apparent until a case goes to trial years after Respondent’s appraiser participates in a political campaign. Petitioner planned to seek the office of Lake County property appraiser for several years before he actually sought permission from his state employer. He never obtained Respondent’s permission to seek political office. He began his campaign without authorization from the Department of Management Services. Petitioner officially began his campaign for Lake County property appraiser when he filed Form DS-DE 9 with the Lake County supervisor of elections on September 11, 1995. At that time he made his intentions clear to the public. Petitioner could not complete the process of qualifying for office and take the candidate’s loyalty oath until sometime between February and July 17, 1996. He did not want to wait that long to begin his campaign activities which included soliciting campaign funds. Petitioner felt he would be at a disadvantage in the campaign if he did not immediately begin to raise money to fund his campaign. In the political campaign, Petitioner made statements concerning the income approach to valuing property. He characterized the use of income capitalization as valuing household or business income and not property. He also characterized the income approach to appraisal as an income tax. These characterizations were in direct conflict with Respondent’s position in a law suit filed by a cable television company against the incumbent Lake County property appraiser and Respondent over tangible personal property taxes. Petitioner’s characterizations about the income approach methodology called into question any appraisals that he conducted in any county using that methodology. During the political campaign Petitioner also made statements concerning impact fees claiming that they have no affect on the value of real property. Petitioner’s statements on impact fees conflict with Respondent’s position on impact fees. It is foreseeable that, as a result of Petitioner’s comments, a taxpayer will litigate the issue of whether impact fees affect property value. Petitioner’s position on impact fees may adversely affect Respondent’s ability to support its position in court. Petitioner made incorrect statements during the campaign regarding the county property appraiser’s assessed value of Lake County property. For example, he claimed that the county property appraiser had assessed the county’s property at 122 percent of its just value in 1994. This statement conflicted with Respondent’s determination that Lake County’s 1994 level of assessment was 93.4 percent. When Petitioner worked for Respondent, he was a Certified Florida Evaluator (CFE). After the termination of his employment, Petitioner was no longer entitled to claim that designation. Nevertheless, Petitioner continued to identify himself as a CFE during the campaign. This campaign tactic contributed to the perception of the county property appraiser that Respondent was acting with Respondent’s sanction. County property appraisers know how Respondent’s appraisers in other counties apply Respondent’s policy. Likewise, Respondent’s appraisers know how their counterparts assigned to neighboring counties apply appraisal principles in Respondent’s appraisal studies. The county property appraisers would become immediately distrustful and suspicious of Respondent’s motives if one of Respondent’s appraisers were to seek the office of county property appraiser. They would assume that Respondent was attempting to call their appraisal methodologies into question. Such a campaign would be disruptive to the tax administration process. It would destroy the atmosphere of trust and confidence that must exist between Respondent and the county property appraisers. Even though Petitioner was a former employee during the campaign at issue here, Petitioner’s candidacy aroused suspicion and distrust on the part of the county property appraiser towards Respondent's tax administration staff and its appraisers. The incumbent and his staff were suspicious that Respondent was promoting Petitioner’s campaign in order to foster its own ideas and judgments concerning appraisal processes and techniques. They were concerned that Respondent would take punitive measures against them during the next audit. Respondent must maintain a neutral position in any political campaign. Respondent certainly cannot be expected to grant its appraiser permission to seek an office but retain the right to oversee the appraiser’s activities and to censure his or her comments. Thus, Respondent properly follows a policy of not approving its property appraisers' candidacies for the office of county property appraiser. The candidacy for the office of county property appraiser by a still-employed agency appraiser presents a real conflict of interest between Petitioner's state employment and Respondent's statutory mission. The campaign at issue here is the perfect example of how the platform or public statements of a candidate can conflict with Respondent's administration and interpretation of the tax laws under Chapters 192-197, Florida Statutes. If Petitioner had continued his state employment, his campaign would have impaired Respondent’s reputation for impartiality and independent judgment in appraisal work and administration of the tax laws among all of the counties under its jurisdiction. On September 3, 1996, Petitioner was defeated in the Republican Primary for the office of Lake County Property Appraiser.
Recommendation Having considered the foregoing Findings of Fact, Conclusions of Law, the evidence of record, the candor and demeanor of the witnesses, and the pleadings and arguments of the parties, it is RECOMMENDED that Respondent enter a Final Order affirming its decision to terminate Petitioner’s state employment based on findings that his candidacy involved a conflict of interest with his continued state employment and that he became a candidate for the office of Lake County Property Appraiser without proper authorization.DONE AND ENTERED this 7th day of March, 1997, in Tallahassee, Florida.SUZANNE F. HOOD Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (904) 488-9675 SUNCOM 278-9675 Fax Filing (904) 921-6847 Filed with the Clerk of the Division of Administrative Hearings this 7th day of March, 1997. COPIES FURNISHED: Patrick A. Loebig, Esquire Brian F. McGrail, Esquire Department of Revenue Post Office Box 6668 Tallahassee, Florida 32314-6668 Marie A. Mattox, Esquire 822 North Monroe Street Tallahassee, Florida 32303 Linda Lettera, General Counsel Department of Revenue 204 Carlton Building Tallahassee, Florida 32399-0100 Larry Fuchs, Executive Director Department of Revenue 104 Carlton Building Tallahassee, Florida 32399-0100
Findings Of Fact At all times pertinent to the allegations contained herein, the Respondents were licensed real estate brokers in the State of Florida. Respondent Ronald Blecker was licensed and operating as the qualifying broker and officer for Blecker Realty and Appraisals, Inc., and at all times alleged in the Administrative Complaint, the Respondents were engaged in the appraisal of real property in Florida for a fee. On or about June 23, 1983, Respondent Blecker, or behalf of Blecker Realty and Appraisal, Inc., (Blecker Realty), appraised a piece of real property known as the Deerfield Yacht Basin , (DYB), a commercial marina located at 580 North Federal Highway, Deerfield Beach, Florida. The appraisal, which reflected that the then fair market value of the property was $3,000,000.00, was requested by a representative of State Capital Corporation, (SCC), for which Blecker had done numerous appraisals over the years for a fee. In fact, Blecker did probably several hundred appraisals for SCC for which he was paid generally $150.00 for a single family appraisal, and $700.00 or $800.00 to several thousand dollars for a commercial appraisal. For the first appraisal of the DYB, Mr. Blecker was paid $1,000.00. Around the same date as the appraisal, June 22, 1983, a contract for sale and purchase of the property in question was executed between Eastern Sea Investment, N.V. as seller and Berkley Multi-Units, Inc., as buyer, for transfer of the property in question for $2,200,000.00. According to the terms of the contract, the seller was to receive a purchase money first mortgage in the amount of $750,000.00 at 6 percent annual interest for five years and a purchase money third mortgage in the amount of $800,000.00 at 6 percent for five years. No second mortgage was called for. In January, 1984, Blecker was asked by SCC to again appraise the property in question, this time including in the appraisal provision for a future 50 boat storage rack to be constructed on the property. With this factor added in, when the second appraisal was completed, it bore an appraisal value of $3,991,525.00 rounded off to $4,000,000.00. This second appraisal took an appraised value cost approach of $3,126,000.00 with a new annual income of $471,000.00 and applied the Elwood Capitalization rate at a .118 rate to it which resulted in an income appraisal of approximately $4,000,000.00. Again, on August 22, 1984, SCC requested Blecker to reappraise the property a third time, this time including 146 proposed boat storage racks. When this was done, a net annual income of $634,000.00 was utilized to which the Elwood capitalization rate was applied and which resulted in an ultimate income approach valuation of $5,113,000.00. In the profession of real estate appraisal, there are basically three methods used to establish the value of a piece of property. These are the cost approach in which the land value and the cost of improvements are factored into an appraised value; the market comparable method whereby recent sales of comparable properties are evaluated to give a general figure of the going price of property of this nature in the area; and the third, the income approach, wherein the property is evaluated on the basis of its income and expenses projected out over a period of years. Mr. John Danner, a registered real estate broker and appraiser and in individual involved in various professional organizations and societies dealing with the practice of real estate appraisal, was called in to evaluate the property in question by representative of the State's Attorney's office which was, at the time, involved in the investigation and prosecution of various individuals affiliated with SCC for possible racketeering. Mr. Danner was called into the case in 1985 and on May 23 of that year, rendered his appraisal report assessing a value of $1,435,000.00. His appraisal has some major differences which are: (1) the description of the property as of the date of valuation, and (2) his use of the sales comparison approach using 31 comparative sales of property with the same potential use. At the time Mr. Danner looked at the property in question, none of the 50 or 146 projected storage racks called for in the latter two Blecker appraisals were in place. There was a concrete slab which could serve as the base for these racks, but no racks had been built and the county building office records reflected that the concrete slab had been poured for a structure permitted in the autumn of 1984. In his appraisal, Mr. Danner considered all existing buildings and construction but did not provide for income of proposed buildings not in existence. Mr. Danner was concerned that his appraisal was so much lower than those rendered by Mr. Blecker. He admits at this point that perhaps he should have considered the proposed storage racks as consideration of the highest and best use of the property, but he did not do so. The property was zoned for commercial use, non residential, and consequently, it could not be used for condominium construction as was reflected as a potential use on Mr. Blecker's appraisal. Having reviewed Mr. Blecker's appraisals, Mr. Danner concluded that all three are improperly done in that appropriate research was not done, documentation to support the figures contained therein is not attached, and the values assigned are beyond the market value of the property. It appeared to Mr. Danner that the June 23, 1983 appraisal for $3,000,000.00 did not appear to consider the 6 percent mortgages. He does not know whether Mr. Blecker considered these mortgages or not, but he did and felt that these mortgages at 6 percent interest, which were much lower than the going mortgage rate at the time, would tend to inflate the valuation of the property. It appeared to Mr. Danner also that in the first two reports accomplished by Mr. Blecker, some comparable sales (one from Jupiter and one from the Keys) were included but neither is in the immediate area. In the third report done by Mr. Blecker, he appeared to have found a third comparable in the Deerfield Beach area but Mr. Danner was not able to do so. Instead, he found his own 31 comparables in both Broward and Palm Beach Counties. Of these, he feels, a great many were available at the time Mr. Blecker made his appraisals. As will be seen, however, many of these 31 comparables were considered to be not comparable and invalid comparisons by experts called to testify on behalf of the Respondents. In fact, in the opinion of Mr. Haddad, an individual who has performed 4 or 5 marina appraisals recently, only 1 or 2 of the 31 listed "comparables" of Mr. Danner can be considered comparable equivalents. Mr. Haddad, who visited the DYB and all but 2 or 3 of the "comparables" listed by Mr. Danner, concludes that the sales comparison approach is not the best for the appraisal of a marina because there are too many variables. In his opinion, it is difficult and improper to try to unitize them, so, unless several units could be found that had comparable equivalents, he would not feel comfortable with the use of that basis for evaluation of a marina. All in all, and considering the relative testimony of the two experts, it is found that the sales comparable method as relied upon by Mr. Danner is not as effective as some other method to be discussed later herein. Mr. Danner was also concerned with the taxes listed in the expense portion of each appraisal form which showed real estate taxes and etc. figure of $30,000.00 for 1983. In reality, the 1983 tax bill was $10,902.00. In January, 1984, the real estate taxes were again listed as $30,000.00, when in reality the taxes were $11,890.00. The August, 1984 appraisal reflected taxes at $35,000.00 and it can be expected that the actual real estate tax figure is proportionately less. However, as the tax figure goes up, while real estate taxes are some indication of property value, the increase in tax paid constituted an increase in expense which results in a lessening of the net income which would cause an overall reduction in the valuation by income approach assessment. Appraisal reports are used generally to establish market value of property for many reasons. Inflated reports can be intentional, or caused by negligence, or because of incompetence of the appraiser. Here, the three reports were done for SCC ostensibly to obtain additional financing on this property. The leaving out of a second mortgage was often a part of SCC's procedure to allow the financing to be increased up to 75 percent of value and inflated appraisal reports would allow SCC to sell second mortgages up to 75 percent of the value. Here, even though the purchase price of the property the same day as the first $3,000,000.00 appraisal was $2,200,000.00, the fact that there was only $1,550,000.00 of mortgage accumulated on the property would, on a $3,000,000.00 appraisal, allow a second mortgage to be sold in a significant amount and if this were to be done, the likelihood is that there would be little if any equity in the property to support that mortgage. Notwithstanding Mr. Danner's recounting of the scheme to be utilized by SCC, while this may have been the purpose of the inflated appraisals, there was no direct evidence to establish this, and Mr. Danner's recitation, even if based on reports to him from the State's Attorney's office, would constitute no more than hearsay evidence which will not, by itself, form the basis for a Finding of Fact. Consequently, absent any additional independent evidence of the purpose behind the increased value of the mortgages, it can only be found that there was no showing of any impropriety by either Respondent. It is not at all unusual for appraisers to differ in their valuations of property. Quite often the purpose behind the appraisal will dictate the approach toward appraisal valuation. It must be remembered that an appraisal is a "probable" value, and in establishing the probable value, all three of the bases for appraisal stated previously, (cost, market comparison, and income) should be considered. A marina is an income producing property and income is an important factor in valuation, but, according to Mr. Danner, not the most important factor. Consequently, the income approach may not be the most accurate or correct basis for valuation as he sees it. Mr. Danner did not use the income approach at all in his valuation. He considered it and had the income information available but did not use it because he could not determine who prepared the information and its accuracy. He questioned its rapid escalation and considered that that information on income which was available was insufficient. As a result, he felt that the market comparison value was more appropriate and in trying to get the necessary data for this comparison, he evaluated comparable sales. Mr. Danner at no time contacted Blecker to see what information he had even though Mr. Blecker's first appraisal reflected that he had owner supplied information. His reason for this was his belief that because he was working for the State's Attorney's office, he was not supposed to contact Mr. Blecker. He did not request permission to do so, however, and as a result, his conclusion is felt to be somewhat incomplete, even by his own admission. Nonetheless, he contends that it is not much off because the income information he would have received from Mr. Blecker would have come from a party a biased sources whose information may have been slanted. As to comparable sales, the subject property is water frontage which is generally more costly than inland property. In considering the proposed improvements, as was done by Mr. Blecker in the second and third appraisals, Mr. Danner considers this to be inappropriate because the appraiser has no way of knowing if the owner of the property will actually construct the proposed improvements. He is, however, to assume that they will in his appraisal and this is what Mr. Blecker did. The size of the proposed construction is about the same regardless of the number of racks, while income would increase threefold. The DYB is currently being operated by a court-appointed receiver, Mr. Roger H. Wagner. As receiver, it is his responsibility to work for the betterment of the operation. He has not appraised this facility but is aware of its history back to the original owners in 1979 and 1980. There have been three transfers of the property from the time of the original owner until the $2.2 million sale to Berkley Multi-Units, Inc. in 1983. In that regard, it should be noted that Berkley Multi-Units, Inc. is a stand-in party for SCC. Mr. Wagner was aware that Mr. Blecker had done two appraisals on the property but did not know why. The existing improvements include a metal building used for carpentry and fiberglass repairs; a building for mechanical repairs; and a building used for offices, sales, and inventory storage and sales. There is also an incomplete slab, docks, underground tanks, and fuel pumps. The slab was built originally to support boat racks and a large forklift. As receiver, Mr. Wagner looked into the completion of the racks and found that because of ordinances it could not be built as originally envisioned. The reasons given were, (1) the land was not platted and (2) no metal structures are allowed within the city and a variance seemed unlikely. After 18 months of receivership, during which time he tried to sell the property, he finally was successful at a sale at which there were in excess of 20 bidders. This was not a distress sale. There was plenty of time allowed for financing by the buyer. The second highest bid was $2.4 million: the highest was $2,405,000.00 plus trustees fee. While Mr. Wagner operated the marina, it generated a significant cash flow. There was some shoddy operation when he took it over, but he was able to put the operation on a paying basis. The owners of the property and Mr. Blecker justify the increase in valuation from $3 million to $5 million by the inclusion of the boat storage racks ultimately expected to be 146 in number. Mr. Wagner initially indicated that his inquiry into the availability of racks indicated that they could not be built. However, in retrospect, he concedes that while the ordinance prohibits "uncovered" racks and metal buildings, as well as the platting requirement, from a strictly legal standpoint, if the property were to be platted and if a cinderblock or wooden building were to be constructed for covered racks, no doubt they could be constructed and generate increased income. Mr. Gary Allen, is a former Vice-President of SCC through which Berkeley Multi-Units, Inc. borrowed substantial money. SCC was a mortgage broker/banker. There were regular business relationships between Berkley Multi- Units, Inc. and SCC and in the course of these dealing over several years, Mr. Allen became familiar with the DYB and Mr. Walt Lehman, its manager with whom he discussed the expansion by the addition of rack storage. Mr. Allen was also familiar with Mr. Blecker long before SCC was formed. He chose Mr. Blecker over other appraisers on the basis of what he knew of him and recommended him to perform the appraisals for SCC and the DYB in particular. Mr. Blecker did three separate appraisals and was paid per appraisal after each one. He received his agreed upon fee and no more. When Blecker did the appraisal, he was normally given any sales contracts on hand with the sales price on them. Allen admits he may have told Blecker what he felt the property was worth and he probably gave Blecker a copy of the contract between Eastern Sales and Berkley. Some 6 or 7 months after the initial appraisal, he called Mr. Blecker and requested a second appraisal with the inclusion of 50 boat racks. At that time, Berkley intended to expand the DYB operation to take advantage of the potential it perceived to be there. Berkley always intended to do this and Allen did not believe it would be impossible to get the required permits. Mr. Lehman was supposed to do this as manager and Lehman never gave him any indication that there would be a problem in securing the required permits. SCC did solicit potential investors for the DYB mortgage but they were not given copies of the appraisal report unless they requested it. No doubt some prospective investors for this project did request appraisal reports but Mr. Allen is not aware of which report they were given or whether any of them ultimately invested in the project. At no time did he have any reason to doubt Mr. Blecker's appraisals. As far as he was concerned, he had no reason to believe they were not conducted in accordance with standard procedures or that they misrepresented the value, and he did not question Mr. Blecker as to the appraisal value estimate. The appraisal value for the DYB did not surprise Allen when it came in. The property is considered to be valuable water-front property in the Boca line. Even though a $3 million appraisal came in on property recently sold for $2.2 million, it did not necessarily please him. He remained neutral about the situation. SCC has used Mr. Blecker primarily to do its appraisals since shortly after starting business. Both Respondents, Orbaker and Blecker were, except at the beginning, the only appraisers SCC used and he used Blecker primarily because (1) his turn-around time was quick, and (2) his fee was reasonable. Mr. Blecker would more often than not come in and ask for income information and expense figures on a property to be appraised but Allen cannot say whether this was done in the DYB case. Mr. Allen feels the jump of $2.1 million in valuation in 13 months was justified by the additional income to be earned as a result of the 146 additional racks. Income will result not only from the rental on the racks but also on the increased operations derived from the storage of 146 additional boats. Rack storage for a 30 foot boat is estimated to cost $100.00 per month per rack. Mr. Allen pled guilty to racketeering and after adjudication of guilt was withheld, was sentenced to 10 years of probation as a result of his involvement with the operation of SCC. The DYB was seen as a gold mine potential investment by Frank J. Kenney, a contractor in practice in Deerfield Beach, Florida, who put together a group of investors to purchase the operation. At the time he looked into the feasibility of putting in a rack system as one of 9 or 10 income sources he saw for the marina. In his investigation of the property toward that end, in early 1986, he discussed the issue of rack construction with the city zoning and planning people and determined that the city requirements would not have precluded construction of the racks. He discussed this proposal with Mr. Wagner, the receiver, who felt that the proposal was good. With proper management he considered an estimate would be that $52 thousand per month gross profit could be achieved within two months of operation and $71.9 thousand-per month gross profit within six months, based on an investment of $2.75 million. His group intended to offer $2.5 million for the entire package but their offer was never made because he heard that someone else was going to bid on the property and he felt that if he could not get it at a steal, he was not interested. Even though he was prepared to offer only $2.5 million for the property, Mr. Kenney though it was worth approximately $5.5 million with the land being worth $2.4 million alone. In considering these figures bandied about by Mr. Kenney, it should be noted that Mr. Kenney was intending to put no money of his own in the investment and it can be concluded quickly that talk is cheap. When one considers a definition of the term, "value, in property, one must recognize that the term means many things. Market value is what a willing buyer is willing to pay and a willing seller is willing to take. In a forced liquidation sale, value is almost always depressed. Buyers expect to pay less than what even they feel it is worth. In the opinion of Dr. William Weaver, a professor of real estate at the University of Central Florida, who espoused the above definition, appraisers may differ in their appraisals. It would be unusual if three different independent appraisers were to come up with the same or similar price for the same property. Special purpose property is that without a ready market. Example of this are schools, churches, and, according to the American Institute of Appraisers, (AIA), marinas, as well as airports and other similar properties. Since these special properties have special purposes, there are special approaches to appraisal of them. The market comparable approach, utilized by Mr. Danner, is difficult to use in special purpose property and if it is used, it should be used only as a check on calculations made utilizing another appraisal approach. In Dr. Weaver's opinion, the preferred approach to marina appraisal would be the cost/income approaches utilized equally for brand new marinas. Older marinas would use the income approach over the cost approach. Market comparables would be the least valid. The AIA suggests the income approach as the best way with the market approach as a check. The cash equivalent calculation utilized by Mr. Danner is, in Dr. Weaver's opinion, theoretically correct, but practically, probably not. Even if financing is way below market as in the instant case, the saving is shared between the buyer and the seller and does not necessarily flow to the property. What is more, as investor sophistication goes up, the effect of this factor on any appraisal or sale is diminished. Capitalization, according to Weaver means the conversion of the income stream into valuation to come up with the present value of the property. This is a part of the income approach and its use is to forecast income into a figure of what someone will pay for the property. It is a time/value calculation. As a result, in a marina situation, one would consider all sources of revenue, lump them together, and do income figuring based on that. Once the income figure is reached, additional calculation is required using the Elwood approach which is an attempt to make the present value calculation simple. Factors do a time/value adjusted computation. It is an appropriate method for use on any income property, including marinas. If the cash flow information is available, it would, in Dr. Weaver's opinion, be a serious error not to use the income approach unless there were a good reason shown not to. Here it should be noted that in each of the three appraisals, the Elwood capitalization calculations were used as is considered appropriate by Dr. Weaver, an expert in the field. Mr. Blecker has served an appraiser in both Florida and Wisconsin for more than 20 years. At no time has he had any financial interest in SCC but merely did appraisal work for them with SCC accounting for approximately 30 percent of his work in 1983 and 1984. As was stated by Mr. Allen, periodically, officials at SCC would suggest to him a figure for appraisal but, according to Blecker, he always came up with his own independent calculations. In doing so he used, primarily, the income approach because he felt it was most applicable to income producing property. He also used the Elwood method in his appraisals because he felt, as did Dr. Weaver and others, that the Elwood approach is appropriate to income property. In the first appraisal, the highest and best use shown for the property was as a marina. He did not use condominium use as a value. When he did the second and third appraisals, he utilized the present value of the property plus income figures derived from racks anticipated for 50 and 146 boats, the information which he got from Mr. Allen. His appraisal was on an "if converted" basis. He had no way of knowing if the work would be done but saw the slab there. Unfortunately, on none of the appraisals did Mr. Blecker clearly indicate that the appraisal was based on an "if converted" basis and his recitation of the proposed construction in the middle of a multi-line paragraph without any highlighting was inadequate. As to appraisal three, again the value given is the actual value plus increased income based on 146 racks. By this time, he had seen plans for the construction of the racks in Mr. Allen's office and had been advised that they were going to put them in. According to Mr. Blecker, he made no mention of the plans because the appraisal was for SCC and as far as he knew, they knew what they were doing. Mr. Blecker did not use comparable sales because he could find none in the area. Those he listed, he got from Ready's research laboratory in Miami. Blecker feels that Mr. Danner's comparables are not really comparable since many are not even marinas and the location of many is vastly different from DYB. This agrees with the testimony of Mr. Haddad and it is found that comparable sales basis is not the appropriate method to use in the case of marinas and in this case in particular. Mr. Orbaker, who was the review appraiser on the second and third appraisals had no part in the first. He was out of town during the time the third appraisal was accomplished but based on the previous work done on the project by Mr. Blecker, which he had seen; based on his previous review of the second appraisal of the same property; and based on rough drafts and agreements on values which were made available to him, he affixed his signature to the blank appraisal form. This is not his usual practice and it was not his intention to have the appraisal go out without him seeing it before it was released notwithstanding the fact that he had seen the property with Blecker several days prior to that time. Mr. Orbaker has done approximately 40 review appraisals for Mr. Blecker for each of which he received $200.00 then doing this, he goes over the appraiser's figures in the office and if he disagrees with the conclusion drawn by the basic appraiser, he goes out and personally views the property. Mr. Orbaker did not compare the third appraisal here with the second. When it went from $4 million to $5 million in valuation, Mr. Blecker explained to him that the racks had been increased with resultant substantial increase in projected income with little increase in expense and it made sense to him. As a result, he accepted Mr. Blecker's assurances as to the ability to put those extra units in. Mr. Orbaker is an associate in Mr. Blecker's real estate office but is on appraisals, however, an independent contractor. He does his own appraisals of residential property, RV parks, and the like from Maine to Florida. He has never, however, appraised a marina in this area. It would appear then, based on the above information, that Mr. Blecker's method of appraisal, utilizing the income method primarily, as modified by the Elwood factor, was the appropriate method of appraisal in this case. It well may be that the property is too highly valued. There is no evidence, however, to show that these appraisals were the result of gross negligence or any unlawful scheme, trick, misrepresentation, or fraud. The relationship with SCC, whose operation was the subject of criminal prosecution, is unfortunate but guilt by association does not apply. There is no showing that Mr. Blecker or Mr. Orbaker knew of any illegal operation or were a part thereof.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is, therefore: RECOMMENDED that the Administrative Complaint filed herein against Respondents Clifford L. Orbaker, Ronald Blecker, and Blecker Realty and Appraisal, Inc., be dismissed. RECOMMENDED this day of June, 1987, at Tallahassee, Florida. ARNOLD H. POLLOCK Hearing Officer Division of Administrative Hearings The Oakland Building 2009 Apalachee Parkway Tallahassee, Florida 32399-1550 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 30th day of June, 1987. APPENDIX TO RECOMMENDED ORDER, CASE NO. 86-1714 The following constitutes my specific rulings pursuant to Section 120.59(2), Florida Statutes, on all of the Proposed Findings of Fact submitted by the Respondent herein. 1. Accepted, 2-4. Accepted and incorporated herein. 5-8. Accepted and incorporated herein. Accepted and incorporated herein. Accepted and incorporated herein. 11-13. Accepted and incorporated herein. Accepted and incorporated herein. Accepted as to first sentence. Second sentence is irrelevant. Accepted. Accepted. Accepted. Accepted and incorporated herein. Accepted and incorporated herein. Accepted and incorporated herein. Accepted and incorporated herein. Accepted and incorporated herein. COPIES FURNISHED: Harold Huff, Executive Director Division of Real Estate Post Office Box 1900 Orlando, Florida 32802 James H. Gillis, Esquire Division of Real Estate Post Office Box 1900 Orlando, Florida 32802 Leslie King O'Neal, Esquire Markel, McDonough and O Neal Post Office Drawer 1991 Orlando, Florida 32802 John W. Wilcox, Esquire Morris, McMichael, Wilcox & Mora 1870 Barnett Plaza 101 East Kennedy Tampa, Florida 33602 Joseph A. Sole, Esquire Department of Professional Regulation 130 North Monroe Street Tallahassee, Florida 32399-0750 Van Poole, Secretary Department of Professional Regulation 130 North Monroe Street Tallahassee, Florida 32399-0750
Findings Of Fact Upon consideration of the oral and documentary evidence adduced at the hearing, the following relevant findings of fact are made: At all times material to this proceeding the Petitioners, Patrick G. Sullivan and George Walter, as individuals, owned the property in question, having purchased it in 1983 which consisted of six acres being used for bona fide agricultural purposes and two acres for commercial purposes, for a total of eight acres. At all times material to this proceeding, the Petitioners leased the property to Gulf Breeze Landscaping, Inc., a corporation whose stock was held in its entirety by the Petitioners. Starting in July 1985 through December 1986 the monthly rental (lease) payment to the Petitioners was $1,916.11 for the eight acres. Starting January 1987 through December 1988 the monthly rental (lease) payment to the Petitioners was $3,000.00 for the eight acres. At all times material to this proceeding, the Petitioners were not registered as taxpayers with the Department, and neither collected any sales tax from Gulf Breeze Landscaping, Inc. for the rental of the property in question nor remitted any sales tax to the Department for the rental of the property in question. The Department's audit was for the period July 1985 through December 1988. The Department's Tax Warrant Worksheet dated January 11, 1989 indicated that the estimated sales tax due on the rental of the property in question for the audit period to be $8,400.00 with $2,100.00 in penalties and $840.00 in interest added for a combined total of $11,340.00. A Clerk's filing fee of $12.00 was added bringing the grand total to $11,352.00. On January 12, 1989 the Department issued a Notice of Assessment and Jeopardy Finding informing the Petitioners of the delinquent sales tax for the audit period. On January 31, 1989 the Petitioners protested the assessment, including the penalty and interest. After some delay, for which the Department assumed responsibility, the Department issued a Notice of Reconsideration on July 2, 1991 which calculated the tax due for the audit period to be $5,769.54 with a $288.48 penalty and interest of $1,032.04 for a total amount of $7,090.06. Along with the Notice of Reconsideration the Department included a Closing Agreement wherein it would be settled for a total amount of $7,090.06 with no interest accruing from January 12, 1989 until payment of the assessment because of the Department's excessive delay in handling the Petitioners' protest. The Petitioners did not execute the Closing Agreement, contending that the rental payments for the use of the six acres being used for bona fide agricultural purposes should have been exempt from the imposition of sales tax under Section 212.031, Florida Statutes. At this point, the Petitioners had presented no evidence that the six acres had been granted agricultural classification pursuant to Section 198.461, Florida Statutes during the audit period. On July 3, 1991, due to the Petitioners' failure to execute the Closing Agreement, the tax assessed began to accrue interest at the statutory rate. For the years 1984 through 1988 the Petitioners neither applied for agricultural classification for the property in question nor did the Property Appraiser of Sarasota County classify the property in question as agricultural pursuant to Section 193.461, Florida Statutes. The sales tax as calculated by the Department for the audit period of July 1985 through December 1988 in the amount of $5,769.54 is mathematically correct as is the interest in the amount of $1,032.04 calculated by the Department. The Department having agreed to compromise the penalty from $1,307.34 to $288.48 due to its excessive delay in acting on the petition, there was no evidence to show that the penalty of $288.48 was excessive, or that the Department acted in an arbitrary or capricious manner in arriving at the amount of the penalty. In fact, the Petitioners do not dispute the calculation of the assessment but only that portion of the assessment contributable to the six acres on the theory that any rental payment for the six acres is exempt from the imposition of sales tax due to the property being used for a bona fide agricultural purpose. In this regard, the Petitioners, at the time of objecting to the Notice of Reconsideration and filing a petition requesting a hearing, paid $1,442.39 tax, $255.01 interest and the total penalty of $288.48. This partial payment of $1,985.88 reduced the tax owed to $4,327.15, and the interest owed to $777.03 as of July 3, 1991 and the penalty to zero.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is, accordingly recommended that the Department enter a Final Order finding Petitioners to owe sales tax on the rental payments for the property in question for the audit period from July 1985 through December 1988 in the amount of $4,327.15 plus interest amount of $777.03 for a total amount of $5,104.18. The $4,327.15 in tax shall accrue interest at the statutory rate beginning July 3, 1991 until paid. RECOMMENDED this 16th day of December, 1991, in Tallahassee, Florida. WILLIAM R. CAVE Hearing Officer Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, FL 32399-1550 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 16th day of December, 1991. APPENDIX TO RECOMMENDED ORDER, CASE NO. 91-4854 The following constitutes my specific rulings pursuant to Section 120- 59(2), Florida Statutes, on all of the Proposed Findings of Fact submitted by the parties in the case. Rulings on Proposed Finding of Fact Submitted by the Petitioners No proposed findings of fact submitted by Petitioners. Rulings on Proposed Findings of Fact Submitted by the Respondent 1. Not material or relevant to this proceeding. 2. Adopted in Finding of Fact 1. 3. - 7. Adopted in substance as modified 14. in Finding of Fact 8. Not material or relevant to this proceeding. 9. - 11. Adopted in substance as modified in Finding of Fact 1. 12. - 13. Adopted in substance as modified in Findings of Fact 3 and 4, respectively. 14. - 18. Adopted in substance as modified in Findings of Fact 10, 11, 12, 13 and 15. 19. - 21. Not material or relevant to this proceeding. 22. Adopted in substance as modified in Finding of Fact 6. 23. - 24. Not material or relevant. 25. Adopted in substance as modified 14. in Finding of Fact Not material or relevant to this proceeding. Adopted in substance as modified in Findings of Fact and 15. Adopted in substance as modified in Findings of Fact and 13. COPIES FURNISHED: Vicki Weber, General Counsel Department of Revenue 204 Carlton Building Tallahassee, FL 32399-0100 J. Thomas Herndon, Exec. Director Department of Revenue 104 Carlton Building Tallahassee, FL 32399-0100 George Walter 1200 North Indian Avenue Englewood, FL 34223 Ralph R. Jaeger, Esquire Department of Legal Affairs Tax Section, Capitol Bldg. Tallahassee, FL 32399-1050
Findings Of Fact Petitioner, Edward W. Hayden (herein Petitioner), was employed by Respondent, West Coast Regional Water Supply Authority (herein Respondent or the Authority), from April 19, 1992 until his discharge on May 5, 1993. During the entire period of his employment, Petitioner held the position of Purchasing and Property Records Manager. Respondent is a water wholesaler for the Pinellas, Pasco and Hillsborough tri-county area. Respondent is managed by a general manager, Harold Aiken, who reports to a board of directors which is comprised of elected officials from five member governments. The five member governments are Hillsborough, Pinellas and Pasco Counties, and the Cities of St. Petersburg and Tampa. Four directors report to general manager Aiken. These directors manage different parts of the Authority subject to the direction of manager Aiken. The general manager implements the policies and directives of the board of directors, administers personnel rules and oversees the day-to-day functions of Respondent. The general manager's authority specifically includes the ability to discharge employees. Petitioner, as purchasing and property records manager, was the person charged with overseeing Respondent's property and purchasing functions. Petitioner was responsible for developing and following procedures for purchasing, inventory control and maintenance of property records. In a nutshell, Petitioner was charged with protecting and safeguarding Respondent's assets. Petitioner's specific duties included developing, administering and managing the disposal of surplus property on behalf of the Authority. Petitioner reported to Koni Cassini, Respondent's director of finance, and general manager Aiken. Petitioner was hired because Respondent had experienced some difficulty maintaining inventory control and the management of its assets. In this regard, Petitioner has extensive experience in accounting and logistics management, having earned a bachelor's degree in business management and a master's degree in business administration. Additionally, he has extensive training in inventory control and management techniques. He served in the U.S. Air Force in excess of twenty years as an inventory management specialist and was assigned a number of critically responsible supervisory/leadership positions. Petitioner, while in the Air Force, managed operations as large as 72 assigned personnel and $42 million of inventory within a strict budget of taxpayer dollars. The purchasing, inventory control and property functions of the Authority are carried out through the finance department. The Authority works under a purchase order system wherein each item that is purchased must have a corresponding purchase order. Purchase orders must be approved by various officials within the Authority depending upon the purchase price. As example, if the price of the item to be purchased is anywhere from zero to $500, a manager's signature is required on the purchase order. For items priced between $500 to $1000, a department director's signature is required on the purchase order. For items priced between $1000 to $15,000, the general manager must approve and sign the purchase order. For items priced in excess of $15,000, the board of directors' approval is required to effectuate the purchase. The signatures are required as part of the Authority's checks and balance system which is used to preserve and protect public funds expended by the Authority. Respondent has specific inventory control guidelines which govern the disposal of surplus property. The guidelines encompass six different procedures to dispose of surplus property. The first, and preferred method of surplus disposal, is by donation to one of the five member governments. The Authority uses a second method of disposal of surplus property which is classified as "junk" if it has no value, is beyond repair, and cannot be donated to a member government. A third method of disposal is to sell the property by sealed bid. The sealed bid method is used when either the quality or quantity of the items for sale is insufficient to justify public auction, i.e., the items are without value to the Authority. The most common way of determining whether the property has any value is to conduct a public auction or to "spot bid" the property. The sealed bid method can be utilized by outside vendors and/or employees. The Authority uses the employee sealed bid surplus sale for items that have no value. It is generally understood throughout the Authority that items that are placed in an employee's sealed bid surplus sale are useless to the Authority or have no commercial value whatsoever. Items placed in that sale are items which are basically to be "thrown away". A fourth method of disposal is "spot bidding". This entails contacting buyers, on an informal basis, to determine whether they are interested in bidding on the surplus property. A fifth and another preferred method of disposal is to sell the property via public auction. The Authority has conducted public auctions in the past either by itself or through the use of a private entity, the Tampa machinery auction, which conducts public auctions on behalf of private and governmental bodies. Tampa machinery auction handles all administrative duties, such as advertising, marketing and operations of the auction including collection of proceeds from the sale. The final method of disposal of surplus property is by "trade-in". This method involves obtaining a trade-in value for surplus property when the Authority is purchasing new property. Upon completion of Petitioner's probationary term of employment, a six-month period, his work performance declined considerably. Specifically, Petitioner was assigned the task of drafting a purchasing manual to be used by the board of directors for the board's approval. Petitioner failed to complete the purchasing manual in a timely manner and the director of finance, Koni Cassini, undertook the drafting and completion of the manual. Cassini completed the draft of the manual and it was approved by the board. During February, 1993, Petitioner decided to conduct the employee surplus property sale which is at issue herein. Petitioner's subordinate, James Krug, who held the position of property specialist, compiled a list of surplus property to be sold at Petitioner's direction. Petitioner and Krug circulated the surplus property list to the general manager and the department directors and also notified them of their decision to conduct an employee surplus property sale to dispose of items on the submitted list. Krug prepared the surplus property list which was reviewed by Petitioner. The surplus property sale was the first employee surplus property sale conducted by Petitioner during his tenure as purchasing and property records manager. Petitioner initially considered having a public auction prior to conducting the surplus property sale, but decided against it based on his "busy schedule". When manager Aiken received Krug's memorandum attaching the list of items to be sold in the surplus sale, he noticed that the list included a telecopier machine. He directed his secretary to contact Petitioner to determine the condition of the telecopier machine. Based on his inquiry, manager Aiken learned that the telecopier machine was functional and, therefore, instructed Petitioner to remove it from the list. He subsequently contacted Cassini to advise that the list contained at least one item of value. He directed Cassini to require that Petitioner provide a detailed description of the items on the list including whether the items were functional, non- repairable, or had any value to the Authority. Subsequently, on March 19, 1993, Cassini contacted Petitioner by memorandum and directed that he provide a description of all items on the list as Aiken requested. The surplus sale was to be held on March 24, 1993. On March 22, 1993, Petitioner sent a memorandum to Cassini stating that he would not provide the requested description of the items for the current sale, but would do so at the next time that the Authority had a surplus sale. At that time, Petitioner assured Cassini that there were no items of value on the current list. Cassini did not follow up on her March 19, 1993, memorandum based on Petitioner's assurance that there were no items of value remaining on the surplus list. Petitioner conducted the surplus property sale, which sale included several items of value including three trench safety units, a three-ton air conditioning unit and a refrigerator. Trench safety units are suspension systems that are used to lower workers into the ground to inspect and repair open pipes. The trench safety units cost Respondent $5,000 each when purchased new during 1990. The surplus property list described the trench safety units as "mini- lift systems". Petitioner described the trench safety units in this manner, even though employees of the Authority referred to the units as "trench safety units" and not "mini-lift systems". Petitioner advised several Authority personnel, including manager Aiken and Cassini, that all of the items on the surplus property list were in rough to poor condition and had no value. As example, he advised the Authority's personnel manager, Holly Manning, that the items on the surplus list were "junk". Respondent purchased the trench safety units for a pipeline investigation in 1990 at the direction of Allison Adams, the Authority's special projects coordinator. The Authority only utilized the safety units during that investigation; however, it could and intended to utilize the safety units in the future for the maintenance of underground pipes or to conduct other subterranean investigations. Petitioner did not contact either the member directors or the general manager for authorization to dispose of the safety units. Likewise, Petitioner did not contact the member governments to determine whether they could use the safety units, nor did he attempt to obtain any sealed bids on the safety units other than through the employee surplus sale. Petitioner did not "spot bid" the safety units prior to including them in the employee surplus sale. Petitioner also listed a three-ton air conditioning unit in the employee surplus sale, despite the fact that it was in good operating condition and had a value of approximately $1,500. Although it was his duty to know all items of value on the surplus sale, Petitioner did not have any idea of the value of the air conditioning unit. Likewise, Petitioner did not spot bid the air conditioning unit prior to including it in the surplus property sale. Two Authority employees purchased the three trench safety units through the sale. Jim Krug, the property specialist who included the units in the surplus property list, purchased one of the units for $223. The other two safety units were sold to Rick Minjarez, a water plant operator, for $175 each. The safety units were in good condition when they were sold. Within ten days of purchasing the safety units from the Authority, Krug and Minjarez sold the items to an outside vendor, who had engaged in business with the Authority in the past, for $1,000 per unit. Cassini conducted an investigation when she learned that the surplus sale had been conducted and that items of value had been sold. Based upon her initial investigation, Cassini recommended that Petitioner and Krug be put on administrative leave without pay pending the outcome of her investigation. Petitioner and Krug were then given an opportunity to explain why the safety units and other valuable property items were included in the sale contrary to his assurance. After Hayden and Krug received pre-termination hearings, Aiken terminated Hayden and Krug on May 5, 1993, based upon Cassini's recommendation. Aiken issued Minjarez a written reprimand for his part because of his failure to bring to the Authority's attention the fact that the items which he purchased were "items of value". Minjarez was not discharged because of Respondent's determination that he was not specifically responsible for protecting the Authority's assets and did not prepare the list of items which were sold. (Minjarez and Krug's disciplinary action is not at issue herein). Petitioner was recommended for discharge by Cassini based upon the fact that he was hired to oversee the purchasing and property functions of the Authority and he failed to fulfill his duties in that regard. Cassini also determined that, by Petitioner's actions, he was insubordinate and misused the Authority's assets to its detriment. Finally, Cassini recommended that Petitioner be discharged because of his insubordination and his failure to comply with her directive that he protect the property interests of the Authority.
Recommendation Based on the foregoing findings of fact and conclusions of law, it is RECOMMENDED that: Respondent enter a final order dismissing Petitioner's petition for relief and terminate him from employment. DONE and ENTERED this 21st day of January, 1994, in Tallahassee, Leon County, Florida. JAMES E. BRADWELL Hearing Officer Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-1550 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 21st day of January, 1994. COPIES FURNISHED: Harold Aiken, General Manager West Coast Regional Water Supply Authority 2535 Landmark Drive, Suite 211 Clearwater, Florida 34621 Thomas M. Gonzalez, Esquire Gregory A. Hearing, Esquire THOMPSON, SIZEMORE Post Office Box 639 Tampa, Florida 33601 Edward W. Hayden 505 Hedgerow Brandon, Florida 33510 Edward P. de la Parte, Jr., Esquire DE LA PARTE & GILBERT One Tampa City Center, Suite 2300 Post Office Box 172537 Tampa, Florida 33672-0537
The Issue Is Petitioner Haas Publishing Company liable for the taxes and interest assessed under Chapter 212, Florida Statutes, specifically the sales and use tax and related surtaxes, pursuant to Section 212.031, Florida Statutes, and Florida Administrative Code Rule 12A-1.070, for the audit period June 1, 1995 through May 31, 2000, and if so, to what extent?
Findings Of Fact Haas is a Delaware corporation, authorized to do business in the State of Florida. It is a subsidiary of Primedia, Inc. Haas publishes free consumer guides to apartments and homes and is paid by the apartment owners, realtors, and homeowners who advertise in the publications. One of Haas' divisions, Distributech, distributes the guides to retail stores. Haas negotiates with retailers for an appropriate site for its display of publications at each retail location. Nationwide, Haas distributes its publications from approximately 42,000 locations. Nationwide, Haas paid for the exclusive right to distribute, under contracts, in approximately 20,000 locations. Otherwise, it distributes in "free" locations. As required by Section 72.011(1)(b), Florida Statutes, Haas has complied with all applicable registration requirements with respect to the taxes at issue herein. DOR is the agency responsible for the administration and enforcement of Florida's tax laws, including sales and use tax and various local surtaxes. DOR conducted an audit of Haas for the period of June 1, 1995 through May 31, 2000. The audit resulted in an assessment of sales and use tax and associated surtaxes, interest, and penalties (Assessment). After protest and petition for reconsideration, DOR issued its Notice of Reconsideration (NOR) to Haas on May 16, 2003, wherein DOR sustained the Assessment in full, but offered to waive all penalties, without prejudicing Haas' right to challenge the remainder of the Assessment in full. Haas accepted the Department's offer to waive all penalties in their entirety, making a payment on the Assessment at the time the Petition herein was filed. In other words, Haas paid certain uncontested amounts in order to pursue the instant challenge to the remainder of the Assessment of all taxes and all interest, and in order to take advantage of an unrelated "extended amnesty" provided by DOR. This formal proceeding followed. The auditor who actually performed the work of the audit did not testify at the disputed-fact hearing. DOR's only witness, Ms. Gifford, did not participate in the original audit. However, Ms. Gifford reviewed the audit documents in detail and professionally consulted with the auditor and other reviewers to review the auditor's methods against the paperwork of the audit. She also reviewed the audit with input from Haas and its representative in the course of the Technical Assistance and Dispute Resolution (TADR) process, and throughout the informal challenges preceding this formal proceeding. She also reviewed all of the de novo material presented at the deposition of Haas' principal, Mr. Sullender, for purposes of her testimony. She is an expert capable of assisting the trier of fact, in that she is a Florida-licensed certified public accountant (CPA), and the undersigned is satisfied with the accuracy of her explanation of DOR's policies and procedures and of her predecessor's methodology and calculations. Also, her interpretations of rules and statutes are entitled to great weight where they purport to be the interpretation of the agency, but they do not constitute "factual" testimony and are not binding in this de novo proceeding. Ms. Gifford's analysis of case law is not entitled to that same deference. At the disputed-fact hearing, Haas challenged both the timeliness of the audit and the methodology of the audit. It is axiomatic that the amount assessed depends upon the methodology employed by the auditor, but DOR contended herein that because Haas protested only that an assessment had been made and because Haas had accepted all available offers of mitigation, Haas could not protest, at hearing, the amount calculated for the Assessment, whether the audit's calculations were correct, or whether the audit had been conducted in a timely manner. The following allegations of the Petition herein are relevant to these issues: No payment made by Haas to a retailer in Florida constituted payment for a lease of real property; No payment made by Haas to a retailer in Florida constituted payment for a license to use real property; The payments made by Haas to retailers were for distribution rights and/or intrinsically valuable personal property rights; The payments made by Haas to retailers were not subject to Florida sales and use taxes and other surtaxes; Alternatively, the payments made by Haas to retailers should have been apportioned by DOR, pursuant to Section 212.031, Florida Statutes; Some or all of the taxes that the Department claims that Haas owes have been paid by the retailers with whom Haas had agreements; The Department was without statutory authority to impose the Assessment for taxes and interest as set forth in Exhibit A; and The Assessment that is the subject of this proceeding is unlawful and violates the provisions of Chapter 212, Florida Statutes; Petitioner is entitled to relief under Sections 72.011 and Section 120.80, Florida Statutes. Section 212.031, Florida Statutes, dictates that the payments made by Haas to Florida retailers were not subject to Florida tax and therefore requires that the Assessment by DOR be stricken or modified. The auditor sent Form DR-840, the Notice of Intent to Audit (NOI), to Haas on May 30, 2000. This item informed the Taxpayer that the period of the audit would be June 1, 1995 through May 30, 2000, and that the audit would commence before July 29, 2000 (within 60 days) unless an attached waiver was signed and returned. The audit file does not reflect a signed waiver within 60 days. Ms. Gifford, on behalf of DOR, testified that the purpose of this NOI was to warn the Taxpayer that the audit would begin within 60 days unless the Taxpayer waived the timeline and that with a waiver, the audit would begin within 120 days. Ms. Gifford further testified that DOR considers itself limited to going back only five years from the date the auditor begins to review a taxpayer's records and that the Agency interprets Section 213.335, Florida Statutes, to require completion of the audit within one year of the initial letter. Ms. Gifford asserted that with a waiver, DOR would interpret the several applicable statutes and rules to provide the auditor with 120 days to begin an audit to encompass the whole of June 1, 1995 to May 30, 2000. However, if an audit is not begun within 120 days, DOR understands that the statutory audit period is not tolled and DOR usually removes the delay period from the front end (i.e., DOR starts the audit period the delayed number of days after June 1, 1995) and adds it to the back end (ends the audit period the delayed number of days after May 30, 2000) so that a five-year period of audit occurs, but the audit period starts some date later than June 1, 1995, and ends some date later than May 30, 2000. DOR considers the start of the audit to be when the auditor begins looking at records of the taxpayer. Haas provided pertinent, but incomplete, records on August 29, 2000, which was more than 60 days and less than 90 days after the May 30, 2000, NOI. Haas requested several extensions to review work papers received from the auditor. All were honored by DOR. A lot of correspondence ensued between the auditor and Haas and between DOR and Haas' designated representative(s)/accountants, but DOR's auditor did not record any time spent on the audit file until he met with Haas or its representative on October 23, 2000, more than 120 days after May 30, 2000. On the basis of the auditor's work record/timesheet, Haas contends that October 23, 2000, which was more than 120 days after the May 30, 2000 NOI, is when the audit actually began. Exchanges of records, work papers, and information continued, and on or about May 29, 2001, a vice-president of Haas signed and FAXED to DOR's auditor a consent to extend the statute of limitations for sales and use tax assessments through March 29, 2002. However, he did not affix the corporate seal in the designated part of the consent form. The consent form had been prepared by the auditor and mailed to Haas on or about March 25, 2001. It only listed "sales and use tax" as a reference. It did not identify any other tax, which ultimately made up the Assessment, including Charter Transit System Tax, Local Government Infrastructure Tax, Indigent Care Tax, or School Capital Outlay Tax, which, although related to sales and use tax, have separate designations. These surtax audits are based on the same facts, circumstances, and records as the sales and use tax audit herein but DOR lists and computes them separately from the sales and use tax on some of its forms. (See Finding of Fact 19.) The validity and timeliness, vel non, of the foregoing consent to extension was not raised by Petitioner until the disputed-fact hearing. A Notice of Intent to Make Audit Changes (also called an NOI) was dated September 21, 2001. The Notice of Proposed Assessment (NOPA) was issued December 5, 2001. DOR considers this document to be the completion of the audit. After the audit was completed, it was submitted to DOR's TADR, a dispute resolution process. A Notice of Decision (NOD) was entered July 30, 2002. Haas petitioned for reconsideration, alleging additional facts. By a May 16, 2003, Notice of Reconsideration (NOR), the audit was upheld. The NOR and NOIA lump all Chapter 212, Florida Statutes' taxes together. The NOPA lists each surtax separately. The compromise of amounts and this formal proceeding followed, as described above in Findings of Fact 5-6. Many contracts and other records were not provided by Haas to DOR until TADR, until the informal proceedings, or until after the Petition for this formal proceeding had been filed. Among other things, DOR had upheld the auditor's initial decision with regard to calculating Haas' 1997 tax. The auditor had not tested or sampled Haas' records for the full of the audit period in order to arrive at a tax figure for 1997. Because Haas had not provided certain records (RDAs) for 1997, Haas' figures for December 1996 were "extrapolated" by the auditor to the first six months of 1997, while the figures for January 1998 were "extrapolated" back to the last six months of 1997. Ms. Gifford felt this method constituted a legitimate estimate of the taxes due where a taxpayer had failed to provide adequate records. For the audit period, Haas published and distributed, free of charge to the public, apartment and home guides. The distribution was accomplished through contracts, on a regional and national level, with major retail store chains such as K-Mart, Blockbuster, Eckerd's, and Winn-Dixie Stores. The tax-assessment problems herein are compounded by Haas' choice not to use uniform contractual arrangements with all retailers; by its failure to designate within its contracts and/or accounting records what, if any, intangible uses it believed it was paying for; and its failure to allocate within its contracts and/or accounting records the amounts it believed it was paying for each alleged intangible use. Some of the contracts state that there is no corporate relation between Haas and the retailer. Haas has one major and several smaller competitors who distribute their own publications at retail store chains. Haas' contracts with the retail store chains guarantee to Haas the exclusive right to distribute apartment and home guides from the retail stores' locations and usually include the right to use the retail chains' respective logos and trademarks in Haas' promotional/sales materials and publications. One exception is Seven-Eleven, which limits to a greater degree use of its trademark and logo than do some of the other retailers. Not every contract contains a reference to a retailer's trademark or logo. Haas used its exclusive rights to distribute with certain retail store chains as an inducement to sell advertising to the apartment owners, realtors, and others who advertise in its publications. It was valuable to Haas to be able to tell potential print advertisers that its apartment/home guide was the only one allowed to be distributed from the particular retail chains. It was valuable to Haas to be able to show potential print advertisers the logo of retailers in Haas' promotional materials and publications. In most places, the exclusive right to distribute from the specified retail locations distinguished Haas from its competitors and allowed it to charge more for its advertising than they did. Mr. Sullender, Haas' principal, is credible that in each instance where Haas' contracts do not mention the use of trademarks and logos, each retail chain otherwise gave permission or provided Haas with its logo and trademark materials to use, as a result of the contracts. However, Haas provided nothing to DOR prior to instituting this formal case, by which DOR could have determined that such permission had been provided outside the contracts. Haas' right to place the retailers' logo or trademark on Haas' publication racks was a valuable right and every Haas rack displayed logos. Yet, the contracts do not obligate Haas to use the retailers' logos or trademarks, and Haas can still distribute from the racks without a logo. The contracts made no specific allocation of payments by Haas to the retailers for use of the retailers' logos and trademarks. The issue of whether payment for use of a logo or trademark should have been separately allocated from Haas' payment to the retailer in its contracts was not taken into consideration by DOR because this issue, in those terms, was not raised during the audit or subsequent informal protest/review procedures. However, the issue of allocation based on fair rental value of the space utilized in connection with prior audits of some of the respective retailers was raised. This is largely an issue of semantics. (See Findings of Fact 55-56.) All except one of the contracts at issue guarantee Haas the exclusive right to distribute its publications from the particular retail chains' locations. Exclusivity of the rights accruing to Haas is singularly important to Haas' business. However, Haas has been known to charge its competitors for space on its racks. Haas also is free to enter into partnerships with its competitors. In order to secure the exclusive right to distribute its publications from the retail locations and the right to use the retailers' trademarks and logos, Haas pays fees to the retail store chains under the contracts. Typically, Haas has to "outbid" at least one other competitor to obtain the foregoing exclusive rights. The payments under the contracts were typically made "per store," per month, and did not vary depending on the location of the store within the State. Part of Haas' negotiating strategy and ultimate success in securing exclusive use of most of its locations is the judicious use of "signing bonuses." Signing bonuses are specifically allocated in some, but not all, of Haas' contracts. In some contracts, they are directly linked to the right of exclusivity. They can be substantial amounts. However, according to Ms. Gifford, signing bonuses have never been part of DOR's Assessment in this case. (TR-62-63) Because the exclusive right to distribute its print materials was so valuable to Haas, it paid up to $375 per month per store under one contract. When Haas did not secure the exclusive right to distribute from a retail chain, it would not pay for the right to distribute, but distributed its publications from "free" locations. Nationwide, this compares at 20,000 paid to 22,000 unpaid locations. (See Finding of Fact 1.) The amount Haas paid a retail chain did not vary by particular store location within the chain nor by the size of the rack that Haas placed in a particular store. Haas' racks take up from two to four-feet worth of floor space. Haas supplied the racks, but, in general, the retail chains had control over the size, type, and color of the racks placed in its stores and limited Haas' access to the racks. Haas was solely responsible for set-up, replenishing, and maintenance of its racks on the retailer's property. Haas purchases liability insurance. Haas is always assigned covered space by the retailer. Haas considers space near an entrance/exit of the retailer's covered premises to be premium space. Retailers consider this same space to be "dead space," beyond its cash registers, which is essentially useless for display or sale of their retail goods. However, some retailers park carts or post notices in these areas. Haas does not sell or distribute any goods of, or for, the retailer. It merely stocks its own publications in its own racks in the retailer's space. Haas has no other contact with the retailers' business. Under the contracts, retailers have no obligation to market Haas' publications. They do not buy or sell them or pay to advertise in them. Retailers pay nothing to Haas. If Haas uses a retailer's logo and/or trademark in Haas' own advertising or in its publications per their negotiated arrangement, it is for the purpose of promoting Haas' publications. Use of the retailers' logos and trademarks has a benefit to the retailer, but a purely incidental one, since the retail customer who picks up a Haas publication from the Haas rack has already made the decision to enter the retail store in the first place. None of the retail chains ever attempted to charge sales or use taxes to Haas based on the payments made under the contracts. There is no evidence that Haas or any retailer, on Haas' behalf, tendered sales or use taxes to the State on the contracts at issue herein. Although some contracts acknowledge that a retailer is a franchisee of a third party, none of the contracts refer to the relationship between Haas and the retailer as a "franchise" or acknowledge Haas as a franchisee. Ms. Gifford did not equate Haas' use of a retailer's logo or trademark to market Haas' publications, not the retailer's goods, with all the accoutrements of a franchise, as she understood those accoutrements. DOR issued to a different taxpayer (not Haas) Technical Assistance Advisement No. 03A-002 (the TAA), concerning real property lease agreements. Although this advisory letter from a DOR attorney is not binding, except between DOR and the party to whom it is addressed, and although it is limited to the specific facts discussed within it, the legal conclusions therein are instructive, if not conclusive, of DOR's official interpretation of the statutes and rules it administers and of its agency policy with regard to when allocations are appropriate between intangible rights and real property rights. TAA 03A-002 cites, with approval, paragraphs 56 through 59 of the Final Order in Airport Limousine Service of Orlando, Inc. v. Department of Revenue, DOAH Case No. 94-1790, et seq., (March 23, 1995)1/ and State ex rel. N/S Associates v. Board of Review of the Village of Greendale, 473 N.W. 2d 554 (Wisc. App. 1991), and states, "The test for isolating intangible business value is as simple as asking whether the disputed value is appended to the property, and thus transferable with the property, or is it independent of the property so that it either stays with the seller or dissipates upon sale." This TAA also states that DOR will view the reasonableness of allocations of payments made pursuant to a lease agreement on a case-by-case basis in reference to whether the allocation is made in good faith or lacks any basis. It further cites with approval Bystrom v. Union Land Investment, Inc., 477 So. 2d 585, 586 (Fla. 3rd DCA 1985) ("Good faith for property tax valuation purposes will mean 'real, actual, and of a genuine nature as opposed to a sham or deception.'") The TAA anticipates that DOR would require that the taxpayer make reasonable allocations, within the taxpayer's own records, of lease payments to rent and other items not subject to tax, and that the taxpayer would also be required to otherwise maintain records adequate to establish how the taxpayer determined that each allocation was reasonable, and further, that if DOR auditors were satisfied with the taxpayer's records, an appraisal would not be required by DOR. The TAA does not foreclose the requirement of an appraisal to test the taxpayer's records. Synopsized, the TAA opines that separate payments by a tenant to a landlord for trademark, service mark, or logo rights of the landlord are subject to the tax on real property rentals unless the allocation of payments made by the taxpayer is reasonable, and further, that the allocation is not reasonable where no substantial, competent, and persuasive evidence is provided to establish the value of the trademark, service mark, or logo rights of the landlord received by the tenant and a legitimate business purpose for the tenant to acquire those rights is not demonstrated. Herein, Haas had not allocated rent and intangibles within its own contracts/records. It was Ms. Gifford's view that if the Taxpayer herein had not allocated the value of the trademarks, etc. and the real property value of its contracts, it was not up to DOR to do so in the course of an audit. Nonetheless, during the protest period, DOR had considered allocating the payments made by Haas under its contracts, into taxable and non-taxable payments, by reviewing the market rate rental for the space occupied and obtaining a valuation of the identifiable intangible property. Ultimately, DOR did not use this method on the basis that Haas had not submitted sufficient records. At hearing, Haas attempted to present evidence of the fair market value of the real estate involved and of the so- called intangible rights through an intangible property appraiser and a Florida-certified real estate appraiser. Lee Waronker is a Florida-certified real estate appraiser who was accepted as an expert in real estate appraisal. Mr. Waronker prepared a report which made a comparison of Haas' contracts with allegedly comparable rental properties, but he only used three "comparables," none of which included racks owned by similar advertising businesses. He did not consider what Petitioner's real competitors paid for similar space. Thus, when he arrives at an average fair rental value of Haas' space in all the retailers' locations as $25-50 per square foot, his base figures are suspect. Therefore, when he concluded that since Haas was paying an average of $355 per square foot and all the remainder of the contract payments should be allocated to intangible rights, such as trademarks and exclusivity, he was not credible or persuasive. His figures also apply only to the date of his appraisal in 2003, and admittedly would not be representative of the value of the rental property during the audit period. Therefore, his analysis that only 11.3 percent, plus or minus, of the contract prices constituted rent or a license to use is discounted and not accepted. Petitioner also presented the testimony and report of James N. Volkman, an intangible property appraiser who was accepted as an expert in that field. Mr. Volkman obtained all of his data from either the Securities and Exchange Commission filings of eighty-three percent of the retailers involved, from Haas, or from information compiled by DOR. These are legitimate appraisal sources. He performed his appraisal within the professional standards of the Financial Accounting Standards Board. He concluded that Haas' contracts could best be described as "distribution agreements," "because they are the means by which Haas distributes its publications" and because anyone familiar with the operations of a publisher would understand a line item on a balance sheet of a "distribution agreement" and not everyone would understand the term "license to use real property." It is noted that "distribution agreements" are not listed in the statute, but this, by itself, is not a fatal flaw. He maintained that the Haas contracts could not reasonably be characterized as a license to use real property, because the amount paid was well in excess of the fair rental value of the space. However, as part of his analysis, Mr. Volkman did not rely on Mr. Waronker's independent real estate appraisal, but conducted his own analysis as to the amount a retailer would likely charge a party seeking to utilize the floor space taken up by the approximate size of a single Haas rack. In doing so, Mr. Volkman was admittedly outside his realm of expertise. Mr. Volkman allocated the amounts Haas was paying as twelve percent to the "right to use real property"; twenty-four percent to "non-compete rights" (his term for exclusivity); fourteen percent to "trademark rights"; thirty-five percent to "distribution cost savings" (a term which seems to describe Haas not having to identify and mail its publications to interested persons or use a retailer's magazine rack);2/ and fifteen percent to "market penetration premium."3/ The last two calculations are not credible and undermine the entire allocations summary he presented. The distribution cost savings figure contains too many assumptions not fully documented. Mr. Volkman also arrived at his calculation of the "market penetration premium" merely by selecting the residual percentage sufficient to make up the difference, so that his other figures added up to 100 percent of the total fee paid by Haas to retailers. His reason for doing this is not plausible. He assumed that just because the growth rate of Haas' business far exceeded the growth rate in multi- family units, it must be that Haas substantially increased its market share during the audit period due to exclusivity. Ultimately, he could not explain the fifteen percent calculation for "market penetration" by the documents he relied on for calculating the other three categories. More damaging to the weight and credibility of his report is that Mr. Volkman did not consider Haas' signing bonuses as having anything to do with the exclusivity rights accruing to Haas. He considered the signing bonuses not to be an intangible right but only "compensation to retailers for negotiating these agreements." However, signing bonus rights seem to be the only intangible rights allocated in any of the contracts and were inherently recognized as such by DOR when it chose not to address them in the Assessment. There are also a number of other questionable portions of his report and opinion which cause it to be discounted and not accepted here.
Recommendation Based on the foregoing Findings of Facts and Conclusions of Law, it is RECOMMENDED that the Department of Revenue enter a final order finding the Assessment factually and legally correct and sustaining the Assessment plus interest to date. DONE AND ENTERED this 18th day of June, 2004, in Tallahassee, Leon County, Florida. S ______ ELLA JANE P. DAVIS Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (850) 488-9675 SUNCOM 278-9675 Fax Filing (850) 921-6847 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 18th day of June, 2004.
The Issue The issues are as follows: (a) whether Respondent violated a standard for the development or communication of a real estate appraisal or other provision of the Uniform Standards of Professional Appraisal Practice (USPAP) in violation of Section 475.624(14), Florida Statutes (1995); (b) whether Respondent failed to exercise reasonable diligence in developing an appraisal in violation of Section 475.624(15), Florida Statutes (1995); and (c) whether Respondent is guilty of culpable negligence or breach of trust in a business transaction in violation of Section 475.624(2), Florida Statutes (1995).
Findings Of Fact Petitioner is the agency charged with the duty of licensing and regulating real estate appraisers in the State of Florida. Respondent is and was at all times material hereto a state-certified general real estate appraiser, having been issued License RZ0001233 in accordance with Chapter 475, Part II of the Florida Statutes. Respondent has been appraising real property in the State of Florida since 1985 and has conducted over 5,000 appraisals. During that period of time, Respondent has not been charged with any disciplinary action or proceeding as an appraiser other than with respect to this particular case. Respondent is the sole shareholder of McCall Realty and Investment, Inc. (McCall Realty). Eighty percent of McCall Realty’s business is appraisals, while 20 percent is attributable to real estate sales, rentals and property management. Respondent is the sole appraiser in his office, but does have two trainees. Imposition of a fine or suspension of Respondent’s license would cause a great degree of financial hardship in that the Respondent and McCall Realty would have to file bankruptcy. On or about March 10, 1996, Respondent developed and communicated an appraisal report (Report) for property identified on the cover page as 5600 Bubba Lane, Milton, Florida 32570 (Subject Property) to Ward Brewer. In his Report, Respondent estimated the market value of the subject property as of February 20, 1996, as $1,095,000.00. The Report contained three separate appraisal form reports as follows: (a) an appraisal of parcel 1, an alleged 160-acre vacant land site valued at $800,000 (Appraisal 1); (b) an appraisal of parcel 2, an alleged 7-acre site with a 1,508 square-foot residence valued at $95,000 (Appraisal 2); and an appraisal of parcel 3, an alleged 25-acre vacant land site valued at $200,000 (Appraisal 3) (the Park Property). Each of the form reports indicated that Respondent was appraising a fee simple interest. On November 28, 1995, Ward Brewer called Respondent’s secretary and indicated that he needed Respondent to do an appraisal. Mr. Brewer indicated that the Subject Property was between 159 and 200 acres and owned by J. W. Hawkins. According to Mr. Brewer, there also was an alleged 25-acre park that was owned by J. W. Hawkins but leased to the State of Florida. Shortly after receiving this message from his secretary, Respondent returned Ward Brewer’s call and confirmed that Mr. Brewer wanted Respondent to appraise the property owned by J. W. Hawkins totaling between 159 to 200 acres, as well as an adjacent park owned by J. W. Hawkins and leased to the State of Florida. Also in that conversation, Mr. Brewer indicated he needed this property to be worth $1 million. In making his investigation for the appraisal, Respondent determined that the Park Property was actually owned by the State of Florida. Respondent then called Mr. Brewer and informed him that Mr. Hawkins did not own the Park Property. Mr. Brewer indicated that the owner, Mr. Hawkins, had donated the Park Property to the State, but that Mr. Hawkins was going to get it back through a reversionary interest because he was having problems with the State of Florida. Mr. Brewer then instructed Respondent to appraise the Park Property as if Mr. Hawkins owned the property in fee simple. Respondent also contacted the property owner, Mr. Hawkins, to determine Mr. Hawkins’ understanding of the reversionary interest. Mr. Hawkins confirmed that he was expecting to get the property back from the State through the reversionary interest. Respondent also inquired of the owner, Mr. Hawkins, as to the size of the property, and Mr. Hawkins indicated that it was somewhere between 150 and 200 acres. Respondent walked the Subject Property on two separate occasions. During his physical inspection of the Subject Property, Respondent walked all over the property except for the island portion. He only viewed the island from the shoreline. He then used an aerial photograph to confirm his understanding of the island. Respondent asked Mr. Brewer if he had a survey of the Subject Property. Mr. Brewer indicated that he did not have a survey. Respondent was not aware that Mr. Brewer was in the process of obtaining a survey. In fact, Appraisal 2 in the Report states that no survey was available. Additionally, the Report contains a disclaimer, which states as follows: This appraiser is not qualified to, nor does the appraisal warrant, the following: * * * 6. The actual location of its designated flood hazard or designated area without a current survey. . . . * * * It is recommended that these items and areas be checked by professionals who specialize in these various fields. It is also recommended that any and all reports prepared by others be made available to this appraiser for consideration in the appraisal process. This appraiser reserves a right of review and/or revision subject to any outside reports submitted on the property appraised. Respondent then began the process of compiling comparable sales. After receiving the Report from the Respondent, Mr. Brewer and others obtained title to a portion of the Subject Property. The purchase price for this phase of the purchase was $300,000. Mr. Brewer and his counsel had the Report and a survey before closing on the Subject Property. Neither Mr. Brewer nor his counsel provided the Respondent with a copy of the survey. Thereafter, Mr. Brewer and the other owners decided to finance the purchase of the remaining portion of the Subject Property. The bank requested Mr. R. Shawn Brantley, to prepare an appraisal of a portion of the Subject Property. Mr. Brantley valued a portion of the Subject Property as of May 2, 1997, at $380,000. Thereafter, Mr. Brantley prepared two additional appraisals of the balance of the Subject Property for $69,000 and $70,000, respectively. Accordingly, Mr. Brantley’s appraised value of the Subject Property a little more than a year after the Report was $519,000. Mr. Brewer and others completed the purchase of the remaining property by paying an additional $270,000, for a total of $570,000. Thereafter, Mr. Brewer and others filed a civil lawsuit against Respondent and McCall Realty. In a settlement of the lawsuit, Mr. Brewer and the other owners received a $300,000 settlement. According to Mr. Brewer, one-half of the settlement amount paid attorneys' fees and costs. The other half of the settlement amount was to offset their losses. Because of the disparity in the appraised values, Mr. Brantley’s client, SunTrust Bank, insisted on knowing why there was a difference in the values. Mr. Brantley subsequently prepared a Review Appraisal Report. Respondent asserts that he had developed one prior appraisal involving wetlands or property with similar characteristics. Respondent did not produce this prior appraisal as requested by Petitioner's investigator. As a result of this entire experience, the Respondent has limited his appraisal practice to single-family residential. Respondent identified the Subject Property in the Report by tax identification numbers, metes and bounds descriptions, aerial photographs and a depiction of the property on a zoning map. Tax identification numbers are found in the Report on the tax roll assessment information sheet. With regard to parcel 2, the assessor’s parcel number is identified as 35-2N-28-0000-00500-0000 on the form report itself. On parcels 1 and 3, the property is identified on the first page of each form appraisal by metes and bounds in Section 35, Township North, Range 28 West and by reference to the “attached aerial photograph.” On the aerial photograph, the Respondent wrote in 1, 2 and 3 corresponding to the separate parcel numbers that he was appraising. Additionally, the Report includes a zoning map that identifies the Subject Property with 1, 5, or 5.3, corresponding to the respective tax identification numbers for the three parcels being appraised. The tax roll assessment information sheet in the Report provides a tax identification number of 35-2N-28-0000- 00100-0000 for parcel 1. One can then go to the zoning map, which identifies parcel 1 by a no. 1 on the zoning map. Parcel is also identified in the Report as containing assessor’s parcel no. 35-2N-28-0000-00500-0000. Here again, this property can be seen on the zoning map and is depicted with a number 5. Finally, parcel 3, the Park Property, is identified as being zoned P-2 and then further identified as the property on the zoning map where the zoning is indicated as P-2. Respondent's effort to identify and describe the Subject Property is inadequate in at least two important respects. First, the Report described the property as 192 acres when it is in fact much smaller, approximately 99 acres. Correct acreage is a fundamental way to describe and identify a property. Second, the Report fails to reveal the existence of wetlands, which were readily apparent. The Report states that the alleged 160-acre tract is bordered by the Blackwater River to the East but fails to specify the following: (a) the property contains seven ponds; (b) a bayou intersects the property; and (c) over half of the property is an island surrounded by at least 50 feet of water. When reading the Report, the only way to discern these characteristics is by reference to the Report's attachments. At the very least, Respondent should have made some attempt to describe the portion of the property that is dry upland and the portion that is covered with water. Respondent did not physically walk the entire length of the island. Instead, he viewed the island across the river and then used an aerial photograph to become familiar with the island. The use of aerial photographs in some instances may be a valuable resource where an appraiser finds it impossible to penetrate every square yard of the property. In this case Respondent did not make an effort to gain access to the island or to navigate around it by boat. Mr. Brewer specifically requested that Respondent appraise the Park Property as if J. W. Hawkins owned it in fee simple. Respondent and Mr. Hawkins discussed the donation of the Park Property and the alleged reversionary interest under which Mr. Hawkins expected to get the property back. Respondent's report failed to disclose the basis of his appraisal of the Park Property. The Report did not mention that the State of Florida had any kind of interest in the land. The report did not refer to a lease or a warranty deed with a reversionary interest. In complying with Mr. Brewer's request regarding the estimated market value of the Park Property, Respondent should have made these disclosures. Respondent failed to provide an adequate analysis and overvalued the Subject Property in part because he failed to consider the impact that wetlands would have on the value of the Subject Property. Respondent did not have to be an environmental or ecological expert to know that property covered by so much water would contain wetlands. Respondent’s Report contains a statement of limitations regarding adverse conditions "such as, needed repairs, depreciation, the presence of hazardous wastes, toxic substances, etc." This statement does not refer to wetlands. The multi-purpose appraisal addendum for federally regulated transactions contained in the Report, provides as follows: ENVIRONMENTAL DISCLAIMER The value estimated is based on the assumption that the property is not negatively affected by the existence of hazardous substances or detrimental environmental conditions unless otherwise stated in this report. The appraiser is not an expert in the identification of hazardous substances or detrimental environmental conditions. The appraiser’s routine inspection and inquiries about the subject property did not develop any information that indicated any apparent significant hazardous substances or detrimental environmental conditions which would affect the property negatively unless otherwise stated in this report. It is possible that tests and inspections made by a qualified hazardous substance and environmental expert would reveal the existence of hazardous substances or detrimental environmental conditions on or around the property that would negatively affect its value. Considering the general description of the Subject Property, Respondent was remiss in not directly addressing the existence of wetlands in his Report and in not expressly stating his expertise (or lack thereof) in appraising wetland property in his statement of limitations and/or disclaimers. The Petitioner did not present the testimony of an ecological or environmental expert to establish the existence of wetlands on the Subject Property. Instead, Petitioner relied on the testimony of Mr. Brantley, who is an expert in the appraisal of wetland property. In his own appraisal performed on a portion of the Subject Property, Mr. Brantley expressly stated with respect to jurisdictional wetlands that: This appraisal is based upon the special assumption that the appraiser’s estimates regarding this matter, as set forth herein, are correct. The reader is expressly notified that the appraiser does not hold himself out to be an environmental or ecological consultant, nor a surveyor, and the reader is encouraged to employ such experts for further confirmation of the conclusions and estimates rendered herein, if they should so desire or should consider it practical to do so. Mr. Brantley went on to qualify his own appraisal further with the following language: Certain portions of the subject property consist of jurisdictional wetlands, which are subject to the rights exercised by the various environmental agencies and governments. This appraisal is subject to the special assumption that that appraiser’s estimates of the amount of area subject to environmental scrutiny is accurate. The appraiser has based these estimates upon observation of topography and wetlands species upon the property, as well as review of various soil and aerial maps. While, the appraiser is of the opinion that these estimates are reasonably accurate, he can assume no responsibility for variations that may be identified by an environmental audit and survey of lines established by an ecological expert. The reader is encouraged to consult experts in these fields for professional verification of the appraiser’s assumptions. During the hearing, Mr. Brantley admitted that he does not warrant his conclusions and assumptions regarding jurisdictional wetlands as a qualified ecologist or environmentalist. He acknowledged that the Subject Property possibly was only seasonally wet and could appear dry for as much as six months out of the year. However, Mr. Brantley's persuasive testimony leaves no doubt that Respondent should have recognized the existence of wetlands in his report and calculated their impact on the value of the Subject Property. In all three appraisals, Respondent used the sales comparison approach to determine the value of each of the three parcels. In making the comparisons, Respondent asked his administrative assistant to calculate the acreage of the Subject Property using the scale on the aerial photograph. Respondent failed to adequately calculate the area of certain comparable sales used in the Report. For example, Respondent used the wrong acreage for each of the comparable sales used in Appraisal 1, the alleged 160-acre parcel, and one comparable sale used in Appraisal 3, the Park Property. Comparable 1 for the alleged 160-acre parcel should have been closer to 51 acres instead of the 40 acres reported by the Respondent. With regard to comparable no. 2 on the alleged 160-acre parcel the acreage is closer to 38.5 acres instead of the 15 acres reported by Respondent. As for the acreage on comparable no. 3 on the alleged 160-acre parcel, the actual acreage was 551 acres and not the 303 acres reported by the Respondent. As for the acreage for comparable number 1 on parcel 3 (Park Property), the acreage was 20.4 acres rather than the 6 acres reported by the Respondent. Respondent should not have relied on the owner's assertion that the comparable property contained 6 acres when Respondent knew the tax identification card indicated 12.91 acres. Apparently, Respondent did not attempt to confirm either of these numbers by checking the deed, which indicated 20.4 acres. Respondent relied on inaccurate acreage for each comparable referenced above. The discrepancies increased the cost of comparable price per acre. The final result was a highly inflated value for the Subject Property. Respondent appraised the value of the Subject Property as $1,095,000.00 as of February 20, 1996. Petitioner’s expert, Mr. Brantley, in his own appraisal of the Subject Property, a little over a year later, valued the property at $519,000. Respondent's and Mr. Brantley's opinions of value are different. In response to questioning from the Court as to whether the removal of a levee on the Subject Property between the time the Respondent appraised the Subject Property and the time that Mr. Brantley appraised the Subject Property affected the value of the property, Mr. Brantley acknowledged that it would have decreased the value. Mr. Brantley indicated that the effect would be the approximate cost that it would take to bridge that particular area where the levee was removed. Petitioner never provided any evidence as to the exact amount or approximate cost that it would take to bridge that particular area. Accordingly, there is no evidence from which the Court can determine that there is a drastic difference in the reported value opinions. Even so, the foregoing facts are sufficient to determine that Respondent's report was misleading and inaccurate.
Recommendation Based upon the forgoing Findings of Fact and Conclusions of Law, it is RECOMMENDED: That Petitioner enter a final order suspending Respondent's license for one year and imposing an administrative fine in the amount of $3,000. DONE AND ENTERED this 17th day of March, 2004, in Tallahassee, Leon County, Florida. S SUZANNE F. HOOD Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (850) 488-9675 SUNCOM 278-9675 Fax Filing (850) 921-6847 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 17th day of March, 2004. COPIES FURNISHED: S. L. Smith, Esquire Department of Business and Professional Regulation 400 West Robinson Street, Suite 802N Orlando, Florida 32801 Robert E. Thielman, Jr., Esquire Baker & Hostetler, LLP Post Office Box 112 Orlando, Florida 32801-0112 Jason Steele, Director Division of Real Estate Department of Business and Professional Regulation 400 West Robinson Street Suite 802, North Orlando, Florida 32801 Nancy Campiglia, General Counsel Department of Business and Professional Regulation Northwood Centre 1940 North Monroe Street Tallahassee, Florida 32399-2202
